Pension fund respondents to this month’s Off The Record survey on the outlook for 2010 had different views on how the new year will shape up.

With regard to the likely pattern of development of the global economic recovery, and perhaps unsurprisingly, the majority of respondents - just under 70% - expect many of the emerging markets significantly to outperform the developed world.

Around 60.5% expect a square-root-shaped recovery, with steady growth below recent trends for the foreseeable future. Just over a fifth of respondents anticipate a W-shaped recovery, with another severe downturn in growth from today’s levels before the recession is over. Only five schemes believe it to be a V or U-shaped recovery, with a return to recent levels of global growth.

A quarter expect Europe’s economy to perform worse than the UK’s or the US’s. However, seven respondents anticipate Europe’s economy will perform better than the UK’s or the US’s, while six believe there is a high risk of deflation during the next 18 months.

Around 68% of respondents expect their short-term domestic interest rates to be higher than they are today by the end of 2010, but by one percentage point or lower. Around 13.5% think the rates will be more than one percentage point higher. Only two respondents expect them to be lower than they are today.

Just over a third (36.5%) of respondents predict that their domestic yield curve will have moved very little by the end of the year, compared with 24.5% that believe it will have remained steep or steepened further from its current position. It will have flattened, say 17% of survey respondents, while 14.5% expect it to have lowered.

Close to 57% think that current economic conditions make shorter-term, dynamic asset allocation more important. Just under 23% believe these conditions make it essential, whereas 13.5% say they make dynamic asset allocation irrelevant, distracting or useless.

Exactly 60% of respondents believe current economic conditions make diversification more important, compared with 17.5% who think the conditions make it essential or less important. Two funds state the conditions made diversification irrelevant or impossible to achieve.

Respondents are split on making tactical allocations specifically aimed at exploiting the economic recovery. Around 45.5% state they had undertaken such moves, while another 45.5% say they had not. Four respondents state they are planning to do so.

“We have predominantly bought sovereign bonds of issuers with relatively low credit ratings - Greece, Ireland, Portugal, Italy, etc,” says a French fund. “We have also deliberately bought bonds of shorter duration than our benchmark as we think the probability of a rise in long duration rates is higher than a fall.”

One UK fund has invested in distressed assets as part of its tactical allocations, whereas a Dutch fund has extended its credit portfolio and a Danish one bought high yield.
Another UK fund has been overweight equities, Asia and emerging markets and made general use of option strategies to exploit rapidly changing market sentiment.

Around 58% of respondents say their priority in 2010 is to protect their downside, ahead of 46.5% who say their priority is to take advantage of the upside. For three pension funds the priority is to reach a positive funding level in 2010.

A French fund says it wants to diversify into real assets such as real estate and forests in 2010, while a German one aims to recover the losses from 2008 in the new year.

A 39% majority of the respondents relies on investment consultants or other advisers for a macroeconomic view for their strategic and tactical asset allocation. Around 32.5% have their own chief economist, head of research or committee to provide this view for them.

“As a corporate pension fund you do not have that luxury,” says a Swedish scheme. “What you do is use your bank contacts to put together a view of future events.”

“We are monitoring the macroeconomic environment on an ad hoc basis and with a certain distance, as we are not involved in tactical moves within asset classes,” adds a Swiss fund. “Having said that we will try to capitalise on extraordinary market conditions.”